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How to Save Capital Gains Tax on Sale of Land? - Calculation & Tax Rates

How to Save Capital Gains Tax on Sale of Land? - Calculation & Tax Rates

Updated on: 10 May, 2024 03:03 PM

Any person who possesses property in India is required to pay taxes on the profits generated from their capital assets. However, there are schemes and strategies available to help minimize the tax burden on capital gains on sale of land. This guide will explore these methods and schemes, but before delving into that, let’s gain an understanding of the types of capital gains and their calculation.

What are Short-Term and Long-Term Capital Gains?
How to Calculate Capital Gains on Sale of Land in India
How to Save Capital Gains Tax on Sale of Land
Tax Exemption on Sale of Land
Capital Gain Account Scheme
Maximizing Capital Gains Tax Savings: Beyond CGAS
Frequently Asked Questions

What are Short-Term and Long-Term Capital Gains?

The taxation of capital gains hinges on whether they are deemed long-term or short-term. If an individual owned the land for less than 24 months or two years before selling it and earned a profit, it is considered a short-term capital gain. On the other hand, if the land is held for more than 24 months or two years, it falls under the category of long-term capital gain.

How to Calculate Capital Gains on Sale of Land in India

Before we learn how to calculate capital gains on sale of land, let’s understand a few terms as described in below table:

Terms	Description
Cost of acquisition	This includes the expenses incurred and the original purchase price of the land.
Cost of improvement	You can add the renovation cost to the land during the holding period to the land acquisition cost.
Selling price	The selling price is the actual amount received from the land transfer. It is crucial to account for any deductions, such as brokerage fees or other expenses directly associated with the sale.

Calculate short-term capital gain-

Particulars	Amount
Total selling Price	₹1,000,000
Less:
Cost of acquisition Expenses directly related to sale and improvement (e.g., brokerage) Exemptions under sections (54B, 54D, 54G, or 54GA (if applicable)	500,000 (xx) (xx)
Short-term capital gains	xxx

Calculate Long-term capital gain-

Particulars	Amount
Total Selling Price	1,000,000
Less:
Indexed cost of acquisition Expenses directly related to sale and improvement (e.g., brokerage) Exemption under Sections 54B, 54D, 54EC, 54F, 54G, or 54GA (if applicable	709,090.91 xx xx
Long-term capital gains	xxx

Notes:

Replace xx with the actual amount for specific expenses and exemptions applicable to your situation.
The indexed cost of acquisition may vary depending on the years of purchase and sale. You can calculate it using the CII published by the government.
Remember to include any applicable exemptions you might be eligible for under the mentioned sections.
The final "xxx" values for STCG and LTCG on sale of land will be different according to your specific expenses and exemptions.

How to Save Capital Gains Tax on Sale of Land

You can save tax on capital gains on land if you invest the amount after selling the land to purchase a house property or construct a new one. You can claim capital gains exemption on sale of land if certain conditions are met.

To claim this capital gains exemption under Section 54F, you must be an individual or Hindu Undivided Family (HUF). Companies, Limited Liability Partnerships (LLPs), and other business entities are not eligible.
The new residential property should be located within India and acquired within the prescribed timeframe:
Purchase: within one year before or two years after the date of land sale.
Construction: commencement within three years of the land sale date.
The new property must be held for at least three years after purchase or construction to qualify for the exemption.
On the date of transfer, the taxpayer shall not own more than one residential property, excluding the newly acquired/constructed one.
Investing the entire sale proceeds in the new property allows you to claim the full capital gains exemption on sale of land. The exemption is proportionately reduced based on the investment ratio if only a portion is invested.

Tax Exemption on Sale of Land

Given below are the sections under which you can claim tax exemption on the sale of land in India -

Section	Exemption
Section 54F	Claim this exemption when using proceeds from land sale to buy a new house property.
Section 54EC	Claim when using proceeds to purchase specific notified bonds.
Section 54B	Claim when proceeds from urban agricultural land sale are reinvested in another agricultural land.
Section 54D	Capital gains on sale of land from compulsory acquisition reinvested in setting up another industrial undertaking.
Section 54G	Exemption for capital gains when shifting industrial undertaking from urban to rural areas.
Section 54GA	Exemption for capital gains when shifting industrial undertaking from urban to special economic zones.

Capital Gain Account Scheme

Investing capital gains within the deadline to qualify for exemption can be challenging due to complexities in property acquisition. Recognizing this, the Income Tax Department offers the Capital Gains Account Scheme (CGAS). This scheme allows taxpayers to deposit their capital gains, even if they haven't yet identified an investment property, and claim exemption from capital gains tax on sale of land when filing their return by July 31st.

Maximizing Capital Gains Tax Savings: Beyond CGAS

If you're not planning to buy another property, investing in the CGAS (Capital Gains Account Scheme) isn't the only way to save capital gains tax on sale of land. You can also invest in specific tax-exempt bonds like REC, NHAI, PFC, or IRFC bonds. These bonds mature after five years and can't be sold before three years from the property sale date. You have six months to invest (but must do so before filing your tax return). The maximum investment in these bonds is Rs.50 lakhs per year.

Not just this, there are various hacks to save tax on capital gains. Our tax experts can help you navigate the provisions of Income tax law and help you maximize your capital gains tax savings. Hire an online CA from Tax2win to get end-to-end ITR filing solutions and tax planning services.

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Frequently Asked Questions

Q- How do I avoid capital gains after selling land?

Capital gains deriving from the sale of a residential property can be exempt from tax under Section 54 of the Income Tax Act, 1961, provided the capital gains are reinvested in purchasing or constructing another residential property within a specified timeframe. The investment in the new property must be made either one year before the sale or two years after the sale of the original property.

Q- Where to invest capital gains from sale of land?

Section 54EC of the Income Tax Act offers an alternative route for capital gains tax optimization. This involves investing the capital gains in designated bonds issued by institutions such as REC, NHAI, PFC, and RFC. Such investments facilitate the deferment of tax liability on capital gains for a period of five years, potentially resulting in tax savings in the long term.

Q- How much capital gain is tax-free?

When you sell an asset for more than you paid for it, the difference is called a capital gain. In India, you only pay tax on capital gains exceeding Rs. 1 lakh annually. The tax rate is 10% (plus cess and surcharge) on the amount that goes above Rs. 1 lakh.

Q- Is it compulsory to open capital gain account?

No, it is not compulsory to open a capital gain account. However, individuals who fail to reinvest their capital gains within the stipulated time can secure their capital gain tax exemption by opening a CGAS account and parking their capital gains in it.

Q- When capital gain account can be closed?

In order to withdraw funds from CGAS, individuals must provide their details in Form G along with necessary documents directly to the Assessing Officer (AO). Upon verifying that all documents are correct and the applicable tax on the deemed capital gain is paid, the AO will then approve Form G.

Q- Do I need to pay TDS on property sale?

Here are the provisions related to TDS on the sale of property under the Income Tax Act, of 1961.

The buyer is responsible for deducting TDS on the property, not the seller.
TDS is not applicable under Section 194IA if the transaction value is less than Rs.50 lakh.
TDS on the property should be paid on the entire sale amount, not just the portion exceeding Rs.50 lakh.